Business Succession Planning
Every business with two or more owners should consider what might happen to the business if one of the owners dies, becomes totally and permanently disabled, or suffers a terminal or traumatic illness.
A business generally depends on a few people to produce the profits, provide the capital, and manage the business. If there is no viable succession plan, there may be significant financial hardship for the surviving business owner(s), as well as for the surviving family members.
Business Succession Planning is an area often neglected by successful business owners, and this lack of understanding can have dire consequences for the business and its partners.
An example of this is a business where there are two equal partners. The value of their respective shareholding is $500,000. If one partner were to die, then the business would need to find $500,000 to pay to the departing partner’s estate. There are a number of options here but most are not viable:
Borrow – May not qualify for a new loan, can the business pay the loan.
Liquidate – Not fair for the surviving business partner, selling price may be well below market value.
Sell Business Assets – These resources may be needed for the business, potential reduction in business cash flow.
Sell Personal Assets – Loss of lifestyle.
Bring in a New Partner – Who would this be? Cost to find, time to find. Potential control issues.
Insurance – Low cost, provides certainty.
A business succession agreement involves the business partners entering into a legally binding written agreement to plan what they are to do with their respective interests in the business should any of them die, become disabled, resign or retire. In this respect, the agreement covers the voluntary and involuntary exit of a partner from the business.
It is vital for any business to have a succession plan in place, but perhaps particularly so for small businesses. Unless you can afford to rebuild your business from the ground up, you need to protect your business from almost any eventuality. While you may think it may not happen to you and your business, you have to imagine how your business would fare in the event of the loss of a partner or key person – would your business survive if you didn’t have a Business Succession Agreement?
We stress that all businesses have a succession agreement in place so the business can continue to operate with minimal distraction in the event of a loss to a key person, and a funding strategy is in place for the departing business partner ensuring a smooth transition during a difficult period.
JBS can assist in this area, please give us a call to discuss further.
